Do you have tuition or other college expenses due for yourself, your spouse, or your child? Would you like to use your IRA to pay for these expenses? Would you like to avoid the 10% early withdrawal penalty for accessing your IRA funds before you are age 59 ½? This article outlines how you can avoid the 10% early withdrawal penalty when using your IRA to pay for higher education expenses.

Whether you should actually take a distribution from your IRA to pay for the higher education expenses of your child is another topic. Sadly, too many parents have raided their own retirement savings to pay for their children’s college education expenses. They then reach retirement age with a sliver of what savings or retirement accounts they could’ve otherwise relied on. Everyone’s situation and goals are unique but if you have decided to use IRA funds to help pay for educational expenses here’s how you can avoid the 10% penalty for accessing your own money.

10% Penalty Exception Rules for Higher Education Expenses

Here’s a quick breakdown on how the 10% withdrawal penalty can be avoided when you use IRA funds to pay for qualifying higher education expenses.

1. Who can the IRA money be used for?

Your IRA funds may be used for qualifying higher education expenses of the IRA owner, their spouse, children, and their descendants.

2. What schools qualify?

Any school eligible to participate in federal student aid programs qualifies. This would include public and private colleges as well as vocational schools. Any school where you, your spouse, or your child completed a FAFSA application will qualify.

3. What expenses qualify?

There is a broad list of qualifying expenses. These include tuition, fees, books, supplies, and equipment. Also, room and board is included if the student is enrolled at least halftime.

4. How much is exempt?

The amount of your distribution that is exempt from tax is computed in three steps. First, determine the total qualifying expenses (tuition, fees, books, room and board, etc.) Second, reduce the qualifying expenses by any tax-free education expenses. These include Coverdell IRA distributions, federal grants (e.g. Pell grants), and any veterans or employer assistance received. Third, subtract and tax-free education assistance from the total qualifying expenses incurred and this gives you the total qualifying amount that you may take an early withdrawal from your IRA and avoid the 10% penalty.

Example

Here’s a quick example to illustrate theses rules: You’re age 53 and have an IRA you’d like to access to help cover your daughter’s education expenses. Your daughter Jane is attending Harrison University, a private college that participates in federal student aid programs.

Total Amount Eligible for a Penalty-Free 10% Early Withdrawal: $29,600

You decide to take a $10,000 withdrawal from your IRA. Since the total amount eligible is $29,600, the entire distribution will be penalty-free. Keep in mind that while the $10,000 distribution is penalty-free it is still included into the taxable income of the IRA owner.

For more details on the 10% early withdrawal exception for higher education expenses, refer to IRS Publication 970. Also, the above example presumes the IRA owner has a traditional IRA. If the IRA owner has a Roth IRA, there are different considerations and distribution rules.

Search

Search for:

Get My Free Self Directed Investor Toolkit and Weekly Newsletter!

You will receive my Free Self Directed Investor Toolkit and Subscribe to My Weekly Newsletter to receive the latest news and updates from our team.

Tom W. Anderson

The "Self Directed IRA Handbook" by attorney Mat Sorensen is the most comprehensive book ever written about one of the best investment and retirement savings tools ever created: the Self-Directed IRA. Mat has performed the impossible by effectively delivering complex information in an easily understandable manner for the layperson, while providing the necessary legal basis to suit the professional. Mat's book is a "must read" for investors, attorneys, CPAs, and other professionals and other interested individuals wanting to learn about all there is to know about Self-Directed IRAs.

Tom W. Anderson

President, RITA, and Founder and Vice Chairman / PENSCO Trust Company

Harry Veldkamp

Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business.

Harry Veldkamp

CEO, Polycomp Trust Company

Pamela Constantino

Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry. Mat has truly written an “Authoritative Guide” for self directed IRAs.

Pamela Constantino

President, Polycomp Trust Company

Mark J. Kohler

Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.

Mark J. Kohler

CPA, Attorney, Author

Richard Davis

I was referred to Matt for help in setting up an IRA owned LLC. Matt and his team did an incredible job completing the work in a few short days. The process was professional, efficient and cost effective. I continue to rely on Matt for guidance running the LLC and related real estate matters. Not only is Matt a good lawyer, he runs a great office. It is easy for me to recommend Matt and his team.

Richard Davis

Christine Farkas

We have used Matt for many legal matters and he always comes through with shining colors. I highly recommend Matt for any legal or tax matter.

Christine Farkas

Real Estate Broker & Investor

Jennifer Cayton

Mathew is the legal partner for the majority of my clients. Matthew provides solid legal advice, precise strategic planning, appropriate corporate structure development, and is readily available to consult with his clients on all legal and business manners. Matthew is well respected and has an extremely large network in the successful real estate investor world. Matthew is reliable, professional and an all around great partner to have on your side

Jennifer Cayton

CFO Consultant / Premier Accounting and Financial, Inc.

Bill Sthay

I have retained Mathew Sorensen several times for multiple real estate deals and have been very pleased with his efforts and work product and will continue to use him in the future.

Bill Sthay

Real Estate Investor

Kade Creamer

My wife and I recently sought Mat's help with estate planning and couldn't have been more satisfied. Mat's professionalism, honesty, creativity and attention to detail is second to none. What impresses me the most about Mat can be summed up as "diverse". Mat's vast knowledge and experience in a plethora of differing areas of the law is astounding. I highly recommend Mat to my clients and friends seeking legal help.

Kade Creamer

Owner / Creamer Insurance Agency, Inc.

Bill Carlson

Mat's advice can be trusted. He is both knowledgeable about the impact of potential litigation and brings creativity to all that he does. It is enjoyable to work with him.

Bill Carlson

CFO / Authentic Property Investors

Valerie Griffin

Mat is a highly qualified...lawyer specializing in real estate. He's personable and professional, knows his stuff and is a nice guy. It doesn't get any better than that. I really liked the way he explained everything to me at my level so I got it. He also advised the best way for me to proceed with my RE investments. He handled my case in a timely manner with high integrity.

Valerie Griffin

Owner / Griffin Investment Properties

Kim Jacobs

I have had the opportunity to engage Mat's services on many occasions and have found him to be diligent and reliable. He has always been committed to delivering high-quality work and is very professional. He is well-liked and respected by his peers. He has my most sincere recommendation.

Kim Jacobs

Treasurer / Jacobs Construction, Inc.

Mathew Owens

Mathew Sorensen is a great resource and I use him consistently for real estate law questions. He is a wealth of information and will always give you a great knowledge base. I have been using KKOS for a while now and am very impressed and happy with their services.

Mathew Owens

CPA, Real Estate Investor

Kenneth P. Child

[Mat] is completely devoted to his clients and continually strives to stay abreast of changes and updates in the law. Mat is an unbelievably hard worker and...I don't hesitate to recommend Mat's services to anyone as I know he will take care of them and give them simple, concise, and straightforward solutions to any legal issue they may be facing.

Kenneth P. Child

Chief Legal Officer / Stake Center Locating

K.M

I am a partner in a law firm in Chicago and I have worked with Mat on my personal real estate and business ventures. Mat has given me practical and wise advice which has helped me make profitable decisions. I highly recommend Mat.

K.M.

Attorney & Real Estate Investor

Gary Shumm

Mathew is an excellent attorney, well versed in the Self-Directed IRA market…His ability to distil the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none. Anyone interested in this Self-Directed IRA Market would do well to connect with Mathew and learn from the best.

Gary Shumm

Vice President / IRA Services Trust Company

Mat is truly an expert on self directed IRAs, and his book is the one book that every self directed IRA investor should read.

Mark J. Kohler

CPA, Attorney, Author / MarkJKohler.com

"A must-read for any self-directed IRA investor."

Kaaren Hall

President / uDirect IRA Services

"Mat's book is an excellent resource for self directed IRA owners and their advisors. It is the first of its kind in our industry. Mat has truly written an“Authoritative Guide” for self directed IRAs."

Pamela Constantino

President / Polycomp Trust Company

"Mat is an excellent attorney, well versed in the Self-Directed IRA market...His ability to distill the complexities of the Self-Directed IRA so that the average person can understand them, and ensure that they don't get "tripped up" is second to none.

Gary Shumm

Vice President / IRA Services Trust Company

"Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs."

J.P. Dahdah

CEO / Vantage Self Directed Retirement Plans

"Mat's books is a great reference guide for self-directed IRA investing – Best I’ve seen in 30 years of being in the business."

Harry Veldkamp

CEO / Polycomp Trust Company

"The Self Directed IRA Handbook by attorney Mat Sorensen is the most comprehensive book ever written about one of the best investment and retirement savings tools ever created: the Self-Directed IRA."

Tom Anderson

Founder and Retired CEO, PENSCO Trust Company

J.P. Dahdah

Mat’s book is the most practical and comprehensive self directed IRA guide in our industry. Reading this handbook should be the first step for any alternative asset investor, investment sponsor, or trusted advisor that seeks to become informed about how to maximize the value of IRAs.